On the eve of the three-year anniversary of president Bush’s controversial bankruptcy bill becoming law, data show that in the last two years nearly 1.5 million individuals filed for personal bankruptcy. The new data further questions the merits of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
This coming Sunday marks the third anniversary of President Bush’s signing of the bankruptcy bill—the largest overhaul to the federal Bankruptcy Code since its enactment in 1978. The costs of this legislation to financially stressed Americans are increasingly evident.
Supporters of the bill in 2005 (including President Bush) argued that BAPCPA would significantly decrease the number of bankruptcy filings by eliminating those who were declaring “bankruptcies of convenience.” Opponents asserted that BAPCPA would only lower the number of bankruptcy filers in the short term as the increased costs and complexity of filing for bankruptcy under the new law would cause financially struggling families to delay filing.
The opponents of the bill proved to be prescient. After a sharp increase in the number of bankruptcy filings leading up to October 17, 2005 (the date the new law took effect), followed by a dramatic drop immediately following this deadline, filing rates have continued to climb. And if data since enactment of BAPCPA is any guide, including numbers released earlier this week by the U.S. Courts, subsequent releases in 2008 and beyond, will likely highlight the continuance of this upward trend.
This continued upward trend shouldn’t really be all that surprising, given that more and more people are losing their jobs and their benefits while still mired in record amounts of debt. By the end of the fourth quarter of 2007, the national Chapter 7 bankruptcy rate had reached 1.7 filings per 1,000 people, which is a 95.8 percent increase from the 0.9 filings per 1,000 people at the end of the first quarter of 2006, the first complete quarter after BAPCPA took effect. Similarly, the national Chapter 13 bankruptcy rate stood at 1.1 filings per 1,000 people in the fourth quarter of 2007, a 62.2 percent increase from 0.7 filings per 1,000 people in the first quarter of 2006.
BAPCPA made it harder for consumers to prove that they should be allowed the “fresh start” of a Chapter 7 bankruptcy, in which a debtor’s assets are liquidated and distributed among creditors—with most of a debtor’s remaining debts cancelled, thus giving the debtor a “fresh start.” Instead, in a Chapter 13 bankruptcy, debtors are put on a repayment plan that lasts up to five years, and only after this time has past are most of the remaining debts canceled. BAPCPA’s amendments meant that many more filers fell under Chapter 13 instead of Chapter 7. The amendments to the bankruptcy code included:
- Mandatory credit counseling session prior to filing for bankruptcy, and money management classes at the expense of the debtor
- More stringent means tests to determine which type of bankruptcy a debtor qualifies for—one based on the median income of the state in which a debtor files for bankruptcy, and the other on the debtor’s ability to pay at least 25 percent of his unsecured debt
- Additional required documents that make the case subject to automatic dismissal if not produced, including a statement of monthly income and any anticipated increases in both income and expenses after filing, tax returns filed during their case (including those for years that may have not been filed when their case began), and a picture ID
- Tougher homestead exemptions that affect the amount of home equity a debtor can protect from creditors
- Increased bankruptcy attorney liability, which has led to increased lawyers’ fees
So why are we now seeing an increase in the number of families going through the more expensive and complicated bankruptcy filing process? Research shows that families are often forced to file for bankruptcy following an unfortunate unplanned event from which they are unable to bounce back because of other financial factors, such as low income and savings levels. The research points to the relationship between bankruptcy and unemployment, low income, debt levels—especially credit card debt—and medical expenditures, particularly for those families who lack health insurance, as the real reasons why people file for bankruptcy.1
All of these factors have been going in the wrong direction for the past two years as the economy began to slow in the wake of a bursting housing bubble. A glance at several leading economic indicators proves that families have indeed been confronted with mounting financial challenges, which increase the pressures confronting a family regardless of BAPCPA’s amendments to the bankruptcy code.
Consider first the job market, which has become increasingly bleak. Since the beginning of the year, the U.S. economy has lost a total of 232,000 jobs through the end of March 2008. Since March 2007, the U.S. economy has only gained an average of 44,770 jobs per month, which is markedly lower than the average monthly job growth of 138,600 jobs in the previous 12 months, and the 236,900 jobs in the 12 months before that.
Wage growth has been equally unimpressive, with stagnant wage growth plaguing workers throughout the current business cycle, which began in March 2001. Hourly wages were only 2.3 percent higher in February 2008 (the last month for which complete data were available) than in March 2001, after factoring in inflation. Real weekly wages grew by only 1.1 percent over the same period.
Then there’s growing family debt, which has reached record highs. Household debt averaged a record 133.7 percent of disposable income in the fourth quarter of 2007, the last period for which complete data were available. Families spent 14.3 percent of their disposable income to service their debt in that same period.
The reasons for rising family debt levels include, among slower income growth, the decline in employer-provided health insurance alongside the rising costs of basic necessities. The share of private sector workers with employer-provided health insurance dropped to 59.7 percent in 2006—the last year for which complete data were available—from 64.2 percent in 2000, leaving more workers to cope with financially debilitating medical emergencies on their own.
On top of this, families are paying more for transportation, the cost of which was up 9.5 percent in January 2008 from a year earlier, college tuition (up 6.2 percent), fuel and utilities (up 5.6 percent), medical care (up 4.5 percent), and food (up 4.6 percent). Since March 2001, food prices rose by 21.6 percent, fuels and utilities by 36.3 percent, medical care by 34.1 percent, transportation by 26.1 percent, and college tuition by 63.5 percent.
Chapter 7 and Chapter 13 bankruptcy filings have continued to increase since the passage of BAPCPA because families who had deferred filing due to the increased costs and complexity of the process are increasingly being forced to file due to financial factors that are at least somewhat out of their control. What’s worse, bankruptcy rates will likely continue to rise, especially as families confront even higher financial pressures amid the current economic slowdown.
If Congress wants to get serious about reducing the number of families faced with the financial hardships that accompany bankruptcy, they must recognize that larger macroeconomic issues are at play and enact policies that help alleviate potential financial hardships from hurting families’ economic stability. Policy solutions that help alleviate potential financial hardships from hurting families economic stability, such as those that call for better health care coverage, support higher income growth for low and middle-income earners, and encourage the growth of good jobs, would likely do more to lessen the bankruptcy rate than BAPCPA.
1. Christian E. Weller and Alanna Gino, “Rising Personal Bankruptcies: A Sign of Economic Strains on America’s Middle Class” (Washington: Center for American Progress, 2005); Mann, “Bankruptcy Reform and the ‘Sweat Box’ of Credit Card Debt” (2006); Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook, “Less Stigma or More Financial Distress: An Empirical Analysis of the Extraordinary Increase in Bankruptcy Filings,” Stanford Law Review 59 (4) (2006): 213-256.
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